THE recently announced sops — marginal increase in DEPB and drawback rates — can hardly reverse the declining trend in textile and garment exports. Nor would the commerce ministry’s comparatively more useful proposal to neutralise state-level taxes in export content, which the Cabinet is expected to consider shortly. Indian textile industry’s principal handicap is that its synthetic raw material base (prices) is globally uncompetitive. If this problem is squarely addressed, then the exporters would even withstand rupee’s appreciation to a considerable extent.
Traditionally, manmade fibres have been subjected to very high levels of tax in India. The upstream industry — the domestic producers of these industrial inputs — used to be ‘protected’ by abnormally high Customs duties. This had undermined the ability of the downstream users of these goods (textile and garment makers) to compete in the global market. Which is why India’s is a predominantly cotton-based (60:40) textile/garment industry, quite the mirror reflection of the world. This ‘skewed fibre mix’ has reduced India’s playing field in the US and the EU, markets which are synthetics-rich.
Recent years’ rapid increase in cotton output — thanks to the cotton technology mission and Bt cotton — has caused a revolution of sorts, further buttressing India’s global competitiveness in cotton-dominant cloth. (82% of Indian exports are now cotton-based). Last year, India emerged as the second largest producer and exporter of cotton (pipping the US in both cases), with production of 280 lakh bales (of 175 kg each) and exports of 55 lakh bales (lb). The cotton year that has just begun is estimated to be even better with production of 310 lb and export of at least 60 lb. Note that just four years ago, India exported just 1 lb and imported 25 lb of cotton. Now, India needs to import only 5 lb (which is almost entirely extra long staple variety which is not available domestically and used for production of the finest fabrics). Not only traders but also farmers have benefited out of this agricultural advance. But has the textile industry, the second largest employment provider in India? Looks doubtful.
First, the industry’s scope for expanding exports due to cotton advantage has been limited and even that was further circumscribed by rupee’s appreciation. In 60% of the US and EU markets (of synthetics-dominant cloth), recent years’ tax cuts have barely made an impact. And the strong rupee ensured it won’t.
The industry, however, clamours more about the adverse impact of surging raw cotton exports on its top lines and bottom lines than of the manmade fibre drawback. That is just because it is a more immediate problem than the long-lasting deprivation of global markets of synthetic textiles and garments which it is wont to. But the policymakers must mind that a more sensible and lasting solution for the problems of textile industry would be to further slash the import tax rates on synthetic intermediates (PTA, MEG, DMT), manmade fibres and filaments (polyester, viscose and acrylic).
Why should upstream industries get protection when that is afflicting the more employment-intensive downstream sector? If the upstream industry is vulnerable to fair competition, it doesn’t deserve any protection. The government’s obligation is merely to shield the domestic industry from unfair competition (dumping).
Coming back to cotton exports, the DEPB benefit (Customs duty remission) given to such exports is actually cornered by a group of traders. Farmers who have no say on where his buyer will sell the produce don’t get any benefit of this. Of course, the price the farmer gets now is much higher than what he used to get three years ago. This, obviously, is because the cotton produced in the country is substantially globally competitive. No wonder, the Indian industry seriously wants cotton exports regulated, even as it is much less anxious to get the import duty on cotton (10%) cut.
The US has reduced the area under cotton, realising that despite a huge subsidy — $4 billion a year for just over 20,000 farmers — it is losing comparative advantage. Cotton fields are being taken over by cone thanks to the demand for ethanol as fuel. Thanks to the increased output, India is exporting significant quantities of cotton to China which is our main competitor in cotton-dominant textiles. Already, China is miles ahead of us in the global synthetics textiles market. Is it desirable to lend China a helping hand by exporting cheaper cotton when that country is already the largest producer of cotton also? Maybe, if India’s cotton production continues to grow at this rate, that would be inevitable in the coming years, but not now when we have only a very limited surplus.
The commerce ministry’s proposal to offset the local taxes would give textile exporters a 6% benefit on their final product price. That is substantial. However, a more effective policy measure would be tax cuts on imports of manmade fibres and intermediates. At present, the basic Customs duty on polyester (PTA, PSF and PFY) is 7.5% while that on viscose and acrylic fibres is 10%. Then there is the 4% countervailing duty in lieu of state VAT. Since textile products are largely out of the VAT chain, the countervailing duty is largely redundant. The basic duty can also come down to, say, 5%. Since there is no major import of these inputs by the textile industry now, the revenue loss on account of the measure is notional. Even after the duty cut, the downstream industry might continue to buy manmade fibres mostly from domestic manufacturers. Threat of imports would merely serve as a check on prices. The resultant boom of the textile industry would enrich the government coffers, too.